Fitch Affirms Accenture's IDR at 'A+'; Outlook Stable
OREANDA-NEWS. Fitch Ratings has affirmed the ratings for Accenture plc (Accenture) and subsidiaries, including Accenture's Long-Term Issuer Default Rating (IDR) at 'A+'/Stable Outlook. Fitch's actions affect approximately $1 billion of debt, including the undrawn revolving credit facility (RCF). A full list of ratings follows at the end of this release.
KEY RATING DRIVERS
Negligible Debt: Fitch expects that Accenture's debt will remain negligible over at least the intermediate term.
Solid FCF & Liquidity: Accenture's liquidity is supported by significant and consistent free cash flow (FCF), despite cyclical demand associated with the consulting and systems integration (C&SI) business. Fitch projects FCF (Fitch defined as post-dividends) will exceed $2 billion annually through at least fiscal 2018. The company had $3 billion in cash and cash equivalents as of Feb. 29, 2016.
Cloud-Driven Consulting Growth: Fitch expects increased customer spending on cloud-related services will continue to drive double-digit consulting growth over the intermediate term. Consulting represented 53% of revenue during the LTM ending Feb. 29, 2016 vs 52% for the year-ago period.
Offshore Delivery Capability: The company's significant and diversified offshore delivery capability, which translates into a strong market position in attractive long-term growth markets, including applications and business process outsourcing.
Profit Margin Expansion: Recent acquisition activity and attendant integration expense should constrain profit margin expansion, which Fitch expects will be modest in FY2016.
Talent Acquisition Challenges: High demand and short supply of talent with the requisite skills in Analytics, Cloud Services, Digital Marketing, and Mobility will likely drive higher labor acquisition and retention costs.
Long-Term Outsourcing Contracts: Fitch believes Accenture's long-term outsourcing contracts, which account for nearly half of revenues, will drive meaningful recurring revenues relative to peers.
Meaningful Diversification: Accenture has a diversified portfolio of customers, industries, geographies and service line offerings, supporting Fitch's expectations for more consistent operating performance than historically.
Competitive Environment: Pricing pressures due to intense competition from multinational, offshore (primarily India-based) and niche IT Services providers.
Legacy Services: Fitch expects that long-term software as a service (SaaS) adoption will suppress demand for traditional systems integration services, particularly enterprise resource planning software. Fitch believes total IT services SaaS revenue generation could be less than that from traditional software implementations over the software's life cycle, despite higher initial revenue from integrating SaaS into clients' existing systems.
--Organic revenue growth of nearly 4% annually;
--EBITDA margin increases by 100 basis points annually through FY2018;
--Post-dividend FCF exceeds $2.3 billion per year through FY2018;
--Most of Accenture's post-dividend FCF will be used for share repurchases and acquisitions;
--Accenture will not engage in significant debt-funded share repurchases or acquisitions that would signify a shift in the company's financial policies.
Negative: Future developments that may lead to a negative rating action include:
--Significant debt-financed acquisitions and/or share repurchases that result in Fitch's expectations for adjusted debt-to-EBITDAR above 2x for a sustained period; or
--Revenue declines from market share losses resulting in Fitch's expectations for annual FCF below $1 billion.
Positive: Fitch does not anticipate further positive rating actions.
As of Feb. 29, 2016, Accenture's liquidity was solid and consisted of:
--$3 billion of cash and cash equivalents, almost all of which was available, given the company's incorporation in Ireland;
--An undrawn $1 billion revolving RCF expiring October 2016. The credit agreement requires the company to maintain a consolidated leverage ratio (debt/EBITDA) of less than 1.75x.
Fitch's expectation for more than $2 billion of annual FCF also supports liquidity. We anticipate Accenture will continue to use FCF for share repurchases and acquisitions.
As of Feb. 29, 2016, Accenture had negligible outstanding debt, given that the company's FCF internally funds shareholder returns and acquisitions.
The company does have off-balance-sheet debt in the form of significant operating lease commitments, since it does not own any of its real estate as part of its 'asset-light' strategy. Nonetheless, Fitch expects total adjusted debt to EBITDAR will remain below 1.5x and was 0.8x for the LTM period ended Feb. 29, 2016.
Fitch affirms the following ratings:
--Long-term IDR at 'A+'.
Accenture International Capital SCA
--Long-term IDR at 'A+';
--Senior unsecured RCF expiring Dec. 2020 at 'A+'.
Accenture Capital Inc.
--Long-term IDR at 'A+';
--Senior unsecured RCF at 'A+'.